A locally developed puppet named Baji is seen performing at the launching ceremony of the Pakistani version of Sesame Street called "Sim Sim Hamara" at Rafi Peer Theatre Workshop in Lahore November 26, 2011.

Sim Sim Hamara debuted last December on state-run Pakistan Television after almost two years of preparation. Flagged by the U.S. government as a signal project that would promote education and literacy in a fun and visible way, the local version of the 43-year-old iconic U.S. TV show introduced to Pakistani children a whole cast of new muppets: Haseen-o-Jameel, a flamboyant crocodile; Baji, a traditional Pakistani woman with a passion for nutrition; Rani, the 6-year-old science-crazy schoolgirl. Plus, of course, Elmo.

The 26-episode first season wrapped in March. Each episode featured songs, life lessons, a “word of the day,” and storylines that promote values like tolerance and respect for elders. The show was filmed in the national language, Urdu, and later dubbed in Pashto and Punjabi. Sindhi and Balochi versions are in the works but everything may now come to an end.

The U.S. Agency for International Development (USAID) last week cut all funding Sim Sim Hamara. The agency had received a tipoff on an anticorruption hotline it had set up in Pakistan to help ensure the effective utilization of U.S. funds. In May, the Americans and their erstwhile Pakistani partner signed a memorandum that mentions, without any specifics, allegations of fraud against the Pakistani producers, and notes that additional U.S. funding shall cease by Sept. 30, 2012, at the latest. “The investigation is ongoing but both parties agreed to end the program together,” says Robert Raines, the agency’s acting spokesman in Islamabad, speaking about Pakistan’s Rafi Peer Theater Workshop. “This is about allegations of corruption,” said U.S. State Department spokesman Mark Toner on Wednesday. “So rather than continue to throw good money after bad, we thought it was prudent to cut off this program and wait for the results of this investigation.”

“It is a conspiracy,” Rafi Peer’s chief executive, Faizaan Peerzada, told TIME. “We have conducted all our operations in line with USAID requirements, down to the type of buses we bought for social outreach programs.” Speaking in Lahore at his family’s Peeru’s Café, which houses the offices and sets of Sim Sim Hamara, Peerzada thinks USAID’s decision to end funding so abruptly may have been motivated by deteriorating ties between Pakistan and the U.S. “I think it was at least partly motivated by that.” The show has been the rare Pakistan-U.S. joint initiative that has never been targeted by conservative groups for promoting American interests or trying to “brainwash” Pakistani children. “The only reaction that the show’s shutdown has elicited is great sadness,” says Navid Shahzad, who performed in the Sesame Street-inspired Such Gup on state television in 1971. “There has been no negative perception even among the diehards.” Indeed, Ali Azmat, a conservative singer who has publicly stated his views against the U.S. war on terror, performed on the show during its first season to show his support.

“We were set to start shooting Season 2 of Sim Sim Hamara on June 15,” Peerzada says. “Even without the involvement of USAID, we had lined up investors who wanted to support this initiative and help reach millions of children across the country.” However, he said, the allegations leveled against his company had jeopardized existing operations and future prospects. “We have no problem with USAID’s decision to end the partnership,” says Peerzada, “but it is unfair to claim that this was motivated by alleged fraud when none exists.” He knew USAID funding would end, but not so soon. “We knew that the maximum possible commitment from USAID was for four years and—if there was money available—$20 million.”

Contrary to Pakistani press accounts, Rafi Peer says it never got the full amount. The promised $20 million was halved shortly after the project was announced, and the remaining disbursal was made subject to congressional approval. USAID’s website, last updated on Jan. 19, confirms that only $10 million had been allocated to the project over a course of four years and also observes that the funding “reflects Congressionally-appropriated funds provided for the project to date.” Of this $10 million, $3 million was allocated to cover Sesame Workshop’s licensing fees, and Rafi Peer was disbursed some $6.7 million as of end-March, according to both Peerzada and the U.S. government.

In the absence of the nature of the fraud charges, the Pakistani media has claimed that it is related to the hiring by Pakistan Children’s Television—the company created by Rafi Peer Theater and USAID to produce Sim Sim Hamara—of Peerzada family members for key positions in the company and for paying off old debts with USAID funds. Peerzada says this is nonsense. “In our original bid, we specifically stated that this was a family business and identified our designations. There was no issue then, I fail to see how this could be an issue now.” Responding to allegations of misappropriation of funds, he said the entire process had been overseen by USAID staffers and there was no capacity, much less intent, for any kind of fraud. On Thursday, he sued Pakistan Today, the newspaper that broke the story, for libel and defamation.

In a statement issued on its blog, the original producer of the U.S. show, Sesame Workshop (formerly the Children’s Television Workshop), was more circumspect. “We trust that the facts will be fairly and fully assessed, and we will wait for the full report,” it said, adding, “It is our hope that the achievements of Sim Sim Hamara, and the gains we have made in the lives of children in Pakistan, will carry on.” That may no longer be possible.

“No one’s questioning obviously the values and positive impact of this kind of programming for children,” the State Department’s Toner told journalists. “We do acknowledge the programming is beneficial, but we had what we believe were credible allegations.”